(Updates story that originally was published July 28, a day before Facebook released second-quarter earnings. The company subsequently reported adjusted earnings of 50 cents a share on sales of $4.04 billion, with both measures exceeding analysts’ estimates.)

Remember in late 2012 when Facebook was going to wither like MySpace? Supposedly, the kids were logging off for good, the transition to mobile would fail, and users would get alienated by more ads, which they’d never click on anyway.

None of those myths rang true to me at the time, the main reason why I suggested the stock in online investing columns and my stock letter in September 2012 and April 2013.

Facebook
FB, +0.65%
shares were selling for $22-$27 at the time, and the stock is now up 275% or more to trade at $94, compared with about 25% to 40% gains for the broader market. So the call worked out, thanks to help from Tom Vandeventer, portfolio manager of the Tocqueville Opportunity Fund
TOPPX, -1.03%
and J.P. Morgan Securities analyst Doug Anmuth. They were key Facebook contrarians at the time who really nailed the analysis when almost everyone disliked the company.

But what about now? Lately, Facebook shares are wobbly ahead of earnings news due after the close of the stock market Wednesday. Is this a sign that reality is catching up with Facebook, and it’s about to nosedive like Twitter
TWTR, +0.05%
? Will Facebook haters finally have their day in the sun?

I doubt it, for a simple reason.

Facebook just took a giant leap ahead in the American Customer Satisfaction Index (ACSI) consumer ratings released July 28. This is typically a sign that a company will outperform. Facebook’s ranking jumped 12% to 75 from 67, on a scale of 100.

Peter Lynch, quantified

To understand why this matters for investors even though it may seem like backward-looking news, consider the following. Studies by former University of Michigan business school professor Claes Fornell, who founded ASCI in the 1990s, show that companies with better consumer ratings tend to vastly outperform over time, as a group.

This makes sense because high customer satisfaction brings advantages like: repeat business, market-share protection and free word-of-mouth advertising. Think of the ACSI consumer surveys as a quantitative version of the old Peter Lynch adage: Buy what you know and like.

There’s also a nuanced accounting angle to this, for the wonks. Companies most likely have to book much of the cost of pleasing customers as a current expense, right away. But the payoff from high customer satisfaction can continue for years. This sets up a mismatch between costs and benefits in the out years. That’ a bonus for long-term investors.

Making the most of ACSI

As Fornell has explained it to me, here’s the key to gleaning investing intelligence from ACSI ratings, and why Facebook passes with flying colors.

1. Look for companies that outrank the group. Here, Facebook and Instagram, which is owned by Facebook, pass the test. They rank 76 and 75, compared with an average of 74 for social media. For context, Facebook handily beats Linkdedin
US:LNKD
Tumblr and Twitter, which got scores of 68-71.

2. More importantly for investors who like to go long, you want to see a ratings gain of 2 points or more, and the bigger, the better. Here, Facebook sparkles. It’s ACSI ranking just surged 8 points to 75 on the ACSI scale of 100. (There’s no baseline for Instagram, since it was not previously ranked.) “The Facebook change is definitely a bigger move than we usually see,” ACSI Director David VanAmburg told me in an interview.

In other words, even though Facebook stock is up about 20% this year, goosed in mid-July by the good earnings news from Google
GOOGL, +1.80%
for long-term investors it’s probably still a “buy” in the weakness ahead of earnings, and even more so if it falls on earnings news. “The gap for Facebook and Instagram is enough, especially so when you couple that with the improvement,” says VanAmburg. (To be clear, he’s not in the business of offering investing advice, and certainly not trading around earnings news. He’s just guiding on what the ACSI numbers may mean for investors.)

What about earnings?

I never suggest making bets on earnings calls since it’s always sort of a crap shoot. But several analysts believe Facebook may surprise to the upside, a view just confirmed by the bullish Facebook results from ACSI.

“Street models are too conservative,” maintains Credit Suisse analyst Stephen Ju, who has a “buy” rating and a $106 price target on Facebook shares. He believes Wall Street consensus numbers underestimate the impact of ramped-up Instagram advertising in the near term. But looking beyond the quarter, he also thinks analysts underestimate the benefits of new products, long term. These include premium video ads, a mobile-ad network, a money-transfer service and Oculus virtual-reality technology. Facebook founder Mark Zuckerberg sees Oculus and virtual reality as key tools for making the world “more open and connected,” his fabled Facebook mission.

1. Mobile. Three years ago, bears hated Facebook because they thought it would fumble the transition to mobile from desktop. Contrarian analysts I talked with at the time questioned that call because of the company’s cash hoard, the huge amount it was spending to hire developers (oddly, supposedly another negative), and the already rapid growth in mobile use and advertising. Now, the ACSI results confirm their take — and what anyone who uses Facebook on phones already knows. Facebook made the transition just fine, thank you.

“People on the go want to do as much as possible on mobile, and the social-media sites are leading the way,” says VanAmburg. More than 1.2 billion of Facebook’s 1.44 billion users check the site on their phones, and about half of its regular users access the site by phone only, according to Morningstar analyst Rick Summer.

“Facebook has made an impressive transition away from the desktop, with 73%-plus of its ad revenue now coming from mobile,” says Barclays analyst Paul Vogel. But there’s lots of room for growth, as more advertising moves online.

In contrast to social-media sites, news, opinion and search sites have a way to go to catch up on ease of use on mobile, according to ACSI.

2. Advertising. Consumers believe social websites like Facebook and Instagram now have a better handle on how to target ads, and give users more relevant ads, says VanAmburg. That’s a big change from not long ago, when users felt inundated with ads, and overwhelmed by the task of filtering through the noise. The change means users are more likely to click on ads, according to ACSI.

“Our targeting has gotten so much more sophisticated,” Facebook’s chief of global marketing solutions, Carolyn Everson, told investors at the J.P. Morgan Global Technology, Media and Telecom Conference in May.

She cited innovations like “Lookalike Audiences.” As you might guess, this helps marketers find customers who are similar to existing customers. Another is “Custom Audiences,” which lets companies find existing customers on Facebook for marketing. “We believe Custom Audiences is performing very well for Facebook advertisers,” says J.P. Morgan’s Anmuth. That’s one reason Facebook remains his top pick in 2015. Here’s another: “We believe it’s still early in monetizing Facebook’s base of 1.44 billion users.”

3. Privacy. This has always been a touchy online issue, and it should be still. But consumers now give social-media sites, including Facebook, much higher rankings on privacy issues, according to ACSI.

The bottom line: Facebook has come a long way as a company and a stock since I suggested it online and in my stock newsletter in early 2013. But the upbeat momentum in consumer rankings we just learned about from ACSI suggests it has a lot more gains ahead. As a long-term investor, I’d be comfortable buying in this weakness ahead of earnings, and adding on any weakness after earnings — if it plays out.

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested FB and GOOGL in his stock newsletter “Brush Up on Stocks” in April 2013 and May 2012. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.

Michael
Brush

Michael Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. Brush has covered business for the New York Times and The Economist group. He attended Columbia Business School in the Knight-Bagehot program.

MarketWatch Partner Center

Michael
Brush

Michael Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. Brush has covered business for the New York Times and The Economist group. He attended Columbia Business School in the Knight-Bagehot program.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.